Key Confusion

[Guest pensionproblems]

I’m new to the retirement plan world, so please bear with me… I thought I had a good understanding of key employees based on my study materials for certification I’m working on. Now that I’m actually doing testing, there are some different opinions between my coworkers over what constitutes someone being key or not. Particularly under the 1% owner or officer test where you need to look at comp. In the interest of my sanity, this is a plea for help in better understanding this concept.

Here is the scenario: Plan is not top heavy for 2011. Employee is a 4% owner and has always been. In 2010, his comp was only $130,000. In 2011, his comp is $169,000. When determining if the plan is top heavy for 2012, is his balance included as a “key” employee because he meets the key requirements for 2011? There is an example in the ERISA outline book almost exactly like this. My interpretation is that yes, he should be included as key because he meets the requirements for 2011 plan year- which is the determination period for this calculation.

But then the ERISA outline book identifies key employee as those who meet the key requirements for the for the prior plan year. So does this mean he is actually not a key for 2011 (and therefore don’t include his balance as of 12/31/11 as key) because he didn’t meet the key requirements as of 12/31/10? Want to make sure I get this right because it directly affects whether the plan is top heavy or not for 2012.

[ETA Consulting LLC]

The determination date for 2011 is December 31, 2010; so you're automatically doing a prior year determination. It's semantics.

Does this help?

[Belgarath]

I agree with Erisa that for 2011 TH determination, you'd look back to 2010. But for 2012 top heavy status, you'd look to see if he satisfied the key employee requirements in 2011 - the lookback year. Yes, he did. So you would count his account balance as a key in your top heavy testing for 2012.

[Bill Presson]

I agree with Erisa.....

This had to be a difficult thing to write!!

(not intended as an insult to the colleague above with the same name!)